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Final

ECON 4423 Study Guide - Final Guide: Seigniorage, Budget Constraint, More Than ThatExam


Department
Economics
Course Code
ECON 4423
Professor
Keith E Maskus
Study Guide
Final

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I ~
1c
l:J
Name
__________
_____
_
Economics 4423 International Finance Spring 2018
Final Examination
I.
(18 Points) Briefly define any three (3)
of
the
following concepts and explain their importance
for
the study
of
international finance. ANSWER ONLY THREE;
IF
YOU ANSWER
MORE
THAN THAT I WILL ONLY
GRADE THE FIRST 3 AND IGNORE THE
LAST
ONE.
@
p),,O
I
a.
Seigniorage
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b. Expenditure switching
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c.
Long-run budget constraint
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BDP
II. (
16
points) Consider the following entries
in
the balan
ce
of payme
nt
s for India. Ind
ia
's curr
enc
y
is
the Rupee
(Rp).
Exports
of
goods and services
Rp
500 billion
Imports
of
goods and services
Rp
750 billion
Income earned by Indians working abroad Rp
300
bi
lli
on
Payments
to
foreigners working in India
Rp
250 billion
Net unilateral transfers
Rp
50 billion
Net Indian private (non-central bank) purchases of
fo
reign
fin
ancial assets
Rp
400 bi
lli
on
Net foreign purchases
of
Indian
fin
ancial as
se
ts
Rp
600 billion
Net foreign direct investment
in
India
Rp
200 billion
' Indian central bank net purchases
of
foreign reserves
Rp
300 billion
(Note: the
la
st row
me
ans the CB bought
Rp
300
billion more
in
reserves than
it
sold.)
a. Determine the following amounts:
Trade balance ,oo -
7~
J
~
-
J.
S::O
b
Net factor income from abroad (NFJA)
30
0 -
l-
5:0
~
t;O b
Current-account balance -
.l-
OOb
t
S::Ob
-o
-
~o
le,
Non-0S8
financial account balance
600
-
>oD
-:.
Cfoo~
Official Settlements balance (OSB)
3oO
b -
300b
Total financial accou
nt
balance !f,80
f:3e6'
-
9GO
b ,t- (
OC>b
~
<f:o
0 -
3o
o
Is India a
net
intern
at
io
nal
borrower or lender?
Borro!Ale
r How can
yo
u tell?
c. Assuming
no
capital
ga
ins on external wealth. what
is
th
e change in India 's external wealth (
in
Rup
es)
because
of
these tran saction?
t,
W =
fJXJ
>
300
-
300
-
loo
b .1~, _
Explain why a current-account deficit makes a country's net external wealth
fall.
Si
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co.p:<o.l
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d.
In
thi
s example. did India 's stock
of
foreign
res
erves held by the central bank rise or fall? Q
,',,
e,
Explain 2 reasons w
hy
the
Indi
an central ba
nk
m
ay
choose
to
buy foreign reserves.
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01
s,
s
Ill. (6 poillls) Recall
fr
om national income accounting that g
ro
ss national income is the sum
of
gross domes
ti
c
product and
nct~c
,!tD,'!l~GNI
=GDP + NFIA. Using this idea, explain which kinds
of
countries tend 10
ha
ve-
hr
g
her"Dl'JI
totals
than
GDP totals. What explains this difference?
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IV ( _
IO
po
ints_) Explain in
econ
om
ic
tenn
s
wy
the current account balance
of
a
co
untry must equal the sum
of
net
pri
vate
sav
mg
(S - I)
plu
s net public savi
ng
(T
-Q).
Why
do
countries with large government budget deficits
h:nd al
so
to
have current account deficits? Explain further how it is that the financial account provides tinanc
in
~
for the c
urr
ent account deficit or surplus and what the role o
fthe
ofticial
se
ttlements balance (OSB) is
in
ma
nagin
g the
exchange
r
a~
.
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C
P..
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,
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d:
.(~e.T<~
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CA
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(v
ser
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=
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1 1 t
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5 -
r..
fJow
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pt
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·
V.
(30
Points). ·
Co
n
siae
r a country that may h
ive
a
fi
xed
or
fl
exible ex'change rate. {THIS IS A s't
ANDARD
CASE
,
OF
ST
AlllLIZATION
POLICY,
NOT
THE
DENMARK
-EU
ROZONE CASE
OF
A
SMALL
COUN
TRY
A
ND
A
LARGE
ANCHOR
COUNTRY
.) Using the IS-LM-FX
fra
m
ewo
rk
(draw
the diagrams and u
se
the space
below
a
nd
on the next page), analyze the following situation. Starting from an initial equilibrium in the ho me
eco
nomy,
supp
ose
there is
an
exogenous increase in foreign investment in housing
and
businesses. Explain all
of
the shifts
you make
in
the diagram
s.
Your
gra
de
will depend
on
the accuracy
of
your
gra
phs and-answers. Clearly label parts
a., h., and e.
of
yo
ur
answer.
a. Let the exchan
ge
rate be
fl
~e.
Analyze the short-run impacts
(u
p
or
down)
of
~ e
as
e in foreign
investment
on
home outp
'frt
(Y), the interest rate (i), the exchange rate (E), consumption (C), inves
tm
ent
(I),
and the tra
de
balance (TB).
b.
Now
suppose the home
ce
ntral bank decides to stabilize the economy by restoring the initial le
ve
l
of
output. Analyze what happens to the same
var
iabl
es
and
the home money supply. - -
e. Now anal
yz
e what would happen to the home money supply, output, the interest rate
and
exchange rate
if
the
co
untry had a
fi
xed exchange rate, instead
of
a
fl
exible
ra
te. Why is it
imp
ossible
to
u
se
mon
eta
ry
policy to stabi lize
0t
1tp
~t in this case?
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0~
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1
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t;,
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ll-f
1-
--
--
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, A
Jh
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3
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